Making sure your partner will be taken care of in case something happens to you is one of the most loving things you can do.
While estate planning is important for all couples, it is essential for same-sex couples (or for couples who decide not to marry), because they do not have many rights married couples take for granted—even if their state allows them to marry. “Federal law trumps state law,” Miami-based financial planner Cathy Pareto tells LearnVest. “And in the eyes of federal law, if you’re a same-sex couple, you are not related—you are basically strangers.” (For this reason, tax planning for gay couples is also tricky. Learn how to navigate tax time.)
Of course end-of-life planning can be daunting enough as it is. And the wide variance in the way states recognize gay couples and ongoing court challenges to the 1996 federal Defense of Marriage Act (DOMA) make same-sex couple estate planning especially complex. But we’ll walk you through the best ways to help protect the life you build together. (One note: While this article is specifically for same-sex couples, much of the information is also relevant to couples who decide not to marry.)
Possible problem: Married partners are considered each other’s next-of-kin. But for a same-sex couple, if one partner becomes incapacitated, the other may not get any say in what medical care she should receive. And if one partner dies, the second partner may find herself shut out of planning the funeral. These issues can be especially thorny if the first partner’s family didn’t know about or approve of the relationship.
Smart Solution: The best way to ensure that your wishes will be honored should something catastrophic happen is to put them in writing now:
- A living will provides clear instructions for various medical situations—such as whether you should be given CPR or a breathing tube.
- Durable powers of attorney are legal documents designating other individuals to act on your behalf should you become incapacitated. A durable power of attorney for health care is often also referred to as a health care proxy and grants a trusted designee the ability to make decisions for you about medical matters that aren’t already covered in your living will. A “springing” durable power of attorney allows you to select someone to make financial decisions on your behalf, but only “springs” into effect should you become incapacitated.
- You can also leave directions about final arrangements and who should handle them to help prevent conflict and make things easier for grieving loved ones. Experts say your wishes should be set forth in a separate document from your will since the will may not be read until after funeral arrangements need to be made.
Possible problem: You may want your partner to get what you leave behind, especially if her income is less than yours, but family members can also claim these assets. This could especially be an issue if you have children from a previous relationship.
- Both partners should make wills clearly specifying who will get each of their assets.
- This option can be pricey, but ideally each partner should also create a revocable living trust. Like a will, a living trust is a legal document that spells out how assets should be distributed. Partners transfer ownership of their assets—such as a house—to their trusts, and they retain control of them during their lifetime. While a will may have to go through probate, a sometimes lengthy process by which the estate of a deceased person is settled by a court, a living trust simply passes to a designated successor trustee upon death. Because the court does not get involved, the trust remains private and is difficult to contest; these qualities make it especially appealing to many same-sex couples.
- Clearly designate your partner as beneficiary on all your investments, including savings, brokerage and retirement accounts. Contact your bank, brokerage firm or human resources department to fill out the necessary paperwork.
- For real estate, opt for the title “joint tenants with rights of survivorship” (if allowed by your state) on the deed if you want the property to pass onto your partner instead of a blood relative.
Possible problem: A child may be the most obvious sign of your bond with your partner, but it may also be the most vulnerable. Many states do not allow same-sex parents to share legal custody of a biological or adopted child. So, for example, if a child’s biological parent dies, the other parent’s custody rights may be jeopardized.
Smart solution: If one partner is the biological parent: According to this New York Times article, when a child is born, the partner of a biological parent can be listed on the birth certificate in most states. This is an easy, free way to establish ties, but it is only a starting point. It is best for the non-biological parent to adopt their child if her state allows it, attorney Joan Burda of Lakewood, Ohio, tells us.
If this isn’t possible, or if neither partner is a biological parent: In the case of a non-biological child, the best-case scenario is joint adoption. If either parent does not have legal or biological ties to the child, both partners should sign and file a joint custody agreement and clearly state that the other should have guardianship of their children in their wills and living trusts. But without a formal adoption, the court makes the final decision. So as a safety net, Burda advises the non-biological parent (or, if neither partner is the biological parent, the parent who has not adopted the child), to become trustee of a trust that holds the child’s inheritance and specifies how much contact this trustee should have with the child. That way, even if the court grants custody to a blood relative, the surviving partner will still control the trust and be part of her child’s life.
Possible Problem: Unlike with married couples, surviving same-sex partners are not entitled to Social Security benefits after a partner dies, even if they are legally married. Also, they can inherit their partner’s 401(k) or IRA but can't roll it over into their own IRA, so they must begin making withdrawals (and paying taxes on them) immediately instead of being able to wait till age 70 and a half like traditional married partners could. As for pensions, the rules depend on the company and state. While some companies may provide a surviving beneficiary half the deceased partner’s pension benefits or more, the same-sex surviving partners of federal employees would not be able to get any pension benefits.
- Save more, and save consistently. A recent Wells Fargo survey found that 61% of LGBT couples believed they would reach their retirement savings goals, but on average they had only saved about 17% of their target amount. Consistent contributions to retirement accounts are crucial, especially if one partner has significantly less income and benefits than the other. This way, if the partner with greater income passes away first, the other partner is more likely to remain financially secure.
- Both partners can also buy life insurance and name each other beneficiaries. This would provide immediate cash that doesn’t have to go through probate.
Possible problem: Granted, it's not a problem for most people, but if a same-sex couple has an estate worth more than $5.12 million and one partner dies, the other would not be able to avoid the steep estate tax (up to 35%) like a married partner would.
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- If there’s a big income discrepancy, the wealthier partner can gift the other up to $13,000 a year exempt from taxes to help even things out.
- Partners should keep careful records of how much they contribute to jointly owned assets like a house, as these amounts will count toward the worth of their estates. So contributions from one partner could keep the wealthier partner’s estate from hitting the five-million-dollar mark.
- Another way to keep from triggering the estate tax is for the wealthier partner to set up an irrevocable life insurance trust (ILIT) to keep a generous life insurance policy from counting toward the worth of her estate. Ownership of the policy transfers to the trust, which is held in the beneficiary’s name and cannot be taxed when the first partner passes away.
Since the rules for same-sex couple estate planning can be confusing, it’s best to enlist the help of a trained financial planner or lawyer, especially if you have children. You may want to seek out an Accredited Domestic Partnership Advisor (ADPA) for instance–someone who has completed a course of study on LGBT issues through the College for Financial Planning. Make sure to review your documents every few years to keep up with changing laws, as well as whenever you make a major life change or move to a new state where the rules could be very different.
Whatever you do, don't put it off. “The most unexpected things can happen,” Pareto says. Your partner or spouse could find themselves completely out in the cold without proper documentation of your plans. The law may not be on your side so you have to take your rights into your own hands.”